While Liz Truss’s well-publicized state intervention to control energy bills has further spooked currency markets, pushing sterling lower than the immediate aftermath of the Brexit vote in 2016, it was widely accepted that whoever the new prime minister was, a package of additional government borrowing of some form was inevitable anyway. So this measure in isolation has not changed our perception of the UK with regards to our direct real estate investment strategies.
“The key for us is ensuring our entry basis shields us from further downside”
The speed with which the UK real estate market has corrected has clearly been faster than anticipated, as has the reduction of liquidity in the real estate debt markets. It reflects the rate of inflation and the rise in base rates to attempt to counter this – no doubt with more rises to come. A recession is highly likely, if it is not already here. The result of all these factors is an increase in uncertainty and an increase in risk. This, of course, makes deploying capital in the UK more challenging, albeit not impossible. The key for us is ensuring our entry basis shields us from further downside. We are a pan-European investor so all these risks also need to be measured relative to the wider European market.
Not all gloom
It is also worth noting that below the macroeconomic picture there are some positive trends in the UK occupier markets. The supply and demand imbalance in the residential rental market, for example, is a wider structural problem for the UK rather than anything triggered by domestic or international politics, as is the undersupply of high quality, ESG-compliant office space and the diminishing supply of last-mile logistics locations. Whether these trends lead to an increase in capital values, despite cap rates softening and the likely reduction in liquidity, will depend on the specific micro asset-level risks.
Are we making any adjustments to your current or future UK exposure plans as a direct result of Truss’s plans and policies? Will her wider vision to stimulate the UK economy add further fuel to the inflationary fire and change our outlook on the UK? I would say: not as a direct result of her election, the challenges and risks in the UK pre-date the leadership election.
Pictet‘s Baigler’s comments also feature in PERE and Real Estate Capital Europe’s analysis of Truss’s appointment on UK real estate, published earlier this week.
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